China's thirst for oil provides an opportunity
iht.com
Judith Rehak IHT
Saturday, October 26, 2002
In an industry dominated by multinational giants such as Exxon Mobil Corp. and Royal Dutch/Shell, China's energy companies are not generally the first stop for investors.
The country's big three are PetroChina Co., China Petroleum Chemical Corp., known as Sinopec, and CNOOC Ltd., all state-owned but traded in Hong Kong and in the United States.
"Because they weren't listed until fairly recently, a lot of people don't understand or follow them," said Mario Traviati, head of Asian energy research for Merrill Lynch Co. in Hong Kong.
There are plenty of reasons for investors to pay attention now. China's economic boom has increased demand for oil at what Traviati described as "almost an alarming rate." Consumption has ballooned to 5.5 million barrels a day; of that, roughly 1.5 million is imported, and that number is rising sharply. Overall demand is projected to rise 4 percent annually for the next three years.
China is also one of the world's largest users of natural gas, and it imports much of that as well.
But like many countries dependent on imports, China wants to rely less on the politically volatile Middle East and generally gain more control over its energy supplies. To that end, PetroChina, Sinopec and CNOOC are already involved in an array of ventures, including deals with international companies.
Traviati favors CNOOC for several reasons: As an offshore operator, it has far more unexplored opportunities, and it has already made some spectacular oil and gas finds off the coast of China.
"Their high level of success in discoveries is why the stock has gone up so much," he said. CNOOC shares have moved up about 50 percent since they made their market debut in early 2001.
CNOOC has also been the most aggressive of the three in ventures with foreign partners. An example was the choice of Australia to sell CNOOC as much as $13 billion of liquefied natural gas from its Northwest Shelf gas fields over the next 25 years. So intense was the competition to win the contract that CNOOC was able to command a 25 percent stake in the venture as part of the agreement.
At first glance, Sinopec, a refiner, and Petrochina, the largest energy company, seem less attractive. Profits for both fell sharply this year after they overproduced refined products such as gasoline, causing prices to plummet. Reductions in bloated payrolls - Sinopec cut 68,000 jobs last year - have come to a halt, apparently to avoid worker unrest ahead of the Communist Party's meeting in November to pick new leaders.
Nevertheless, advocates of these companies see better times ahead. Erwin Sanft, an energy analyst at CLSA Emerging Markets in Hong Kong, has "buy" ratings on both, noting that the two rivals are now cooperating to maintain production of refined products at profitable levels.
"We expect more improvement in earnings in the third and fourth quarters," Sanft said. Second, the sustained strength of crude oil prices has helped to offset high operating costs at both companies. A barrel of crude oil has traded as high as $30 in recent weeks and in the high $20 range for the past few months.
Acquisition activity, which got off to a slow start at both companies, is also picking up. For example, PetroChina, which had done only one deal, is now armed with $5 billion and accelerating its program.
Sinopec and PetroChina also share another attraction for investors: fat dividends. Sanft figures that even if crude falls to $22 a barrel, Sinopec and PetroChina will be able to maintain yields of 6 percent and 7 percent, respectively. "And even allowing for some weakness in the price of oil, these companies are undervalued at the current share price," he said.
For more information:
CNOOC LTD. Web site: cnoocltd.com
PETROCHINA CO. Web site: petrochina.com.cn
SINOPEC Web site: sinopec.com.cn |
